China trade figures provide lift for Australia

As China’s once- in-decade leadership transition enters its crucial week, stronger than expected export and trade balance data from the world’s second largest economy is a welcome boost for Australian resources companies.

The pace of China’s exports rose to a five-month high of 11.6 per cent in October year on year, beating market expectations for 10 per cent growth. China’s October trade surplus also came in at $US32 billion, well ahead of expectations of $US27.3 billion.

Significantly for local miners, volume growth in iron ore imports rebounded to 13 per cent in October, compared with 7.3 per cent in September.

ANZ chief economist for greater China, Li-Gang Liu, said the bounce in iron ore imports suggested port inventories had been used up, which should continue to support the recovery in iron ore prices.

“Around 60 per cent of Australian iron ore goes to China so it’s a good sign for Australian resources," he said.

While questions remain over the reliability of China’s government economic data, a smooth leadership transition will at least reassure investors about the country’s policy direction.

“We do wonder about the accuracy of a lot of that data," said Perpetual head of equities Matt Williams.

“But it does seem that as the leadership transition occurs we’re getting a bit of renewed confidence in China and that will flow through to some commodity prices especially iron ore."

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Mr Williams said that the high Australian dollar and high costs are headwinds for the resources sector, but better iron ore and coal prices could ease some of the pressure on margins.

The outlook for mining services companies remains bleak,with a profit warning from Emeco last week further unnerving investors concerned about the health of the broader sector as mining investment tapers off.

The appointment of Vice-President Xi Jinping as President
Hu Jintao
’s replacement is considered a formality. But there are still some unanswered questions ahead of the finalisation of China’s top officials on Wednesday.

“There’s a lot of uncertainty as to who the remaining five or seven standing members of the politburo will be," Mr Liu said.

“Whoever takes charge of China’s economy, financial sector reform and what kind of policy road China will take is extremely important."

The weekend’s solid Chinese trade data followed better than expected October numbers for industrial production, retail sales and fixed asset investment on Friday, reaffirming the market’s belief that China’s economy has stabilised.

“The overall sense in the market is that China is actually bottoming. We’ve had a string of reasonably poor data coming out of China and that seems to be coming to an end. That’s very good for Australia and for the rest of the world," said BT Investment Management head of macro strategies Joe Bracken.

Despite the positive news from Australia’s largest trading partner, the SPI futures point to a 0.33 per cent decline for the S&P/ASX 200 index on Monday.

Leads from offshore were muted but largely positive with the S&P 500 index climbing 0.17 per cent on Friday, suggesting the US equity market has steadied after a bout of volatility after the elections.